Greek bonds fell after Standard & Poor's cut the country's credit rating and threatened to take further action unless Prime Minister George Papandreou tackles the European Union's largest budget deficit.
The euro also slid against the dollar and the yen after S&P (MHP) said in a statement yesterday it lowered the rating by one level to BBB+ from A-. Fitch Ratings cut Greece's debt to the same level on Dec. 8. The yield on the benchmark 10-year Greek government bond has increased 52 basis points this month to 5.51 percent, the highest among the 16 euro-region countries. Papandreou pledged on Dec. 14 to implement "radical" measures to fix the budget.
"The market is telling you that there's concern at the implementation of the plans," said Steven Major, global head of fixed-income research at HSBC Holdings Plc in London. "There's a lot of positive talk from Greek officials going round, but the market needs to see some action."
The yield on Greece's 10-year bond rose 7 basis points to 5.8 percent as of 7:47 a.m. in London. The 6 percent security maturing in July 2019 dropped 0.5, or 5 euros per 1,000-euro ($1,441) face amount, to 102.99. The euro weakened 0.9 percent versus both the dollar and the yen.
Papandreou's government, which came to power in October promising higher spending and wages, is trying to persuade investors it will step up efforts to cut its deficit to below the EU's limit of 3 percent of gross domestic product by 2013, from 12.7 percent now. Concern that countries may default was reignited after Dubai's state-owned Dubai World said it wanted to restructure $26 billion of debt.
Greece's "ratings could be further lowered if the government is unable to gain sufficient political support to implement a credible medium-term fiscal consolidation program," Marko Mrsnik, a credit analyst at S&P in London, said in yesterday's statement. Greek bonds recovered some of their losses yesterday after Finance Minister George Papaconstantinou said in an interview that the country will cut its 2010 budget deficit by 4 percentage points, more than previously targeted.
The yield premium, or spread, investors demand to hold Greek 10-year bonds instead of German bunds, Europe's benchmark government securities, narrowed 18 basis points to 232 basis points. It widened back to 238 basis points today.
S&P's decision came after it put Greece's rating on watch for a downgrade on Dec. 7. Greece's ranking is the lowest in the euro region and three steps short of non-investment grade, or junk. Moody's Investors Service has an A1 rating on Greece's debt, three levels higher than the Fitch and S&P grades.
"BBB+ for a country is worrying," said Emeric Challier, a fund manager at Avenir Finance Investment Managers in Paris, where he helps manage about $840 million in debt. "It's an important surprise coming from S&P. We didn't expect it this soon."
Papandreou on Dec. 14 outlined his government's four-year plan to cut the shortfall below the EU's ceiling, appealing to unions and employer groups to help him change pension and tax rules to deliver "radical" action.
EU officials are trying to assure markets that Greece won't default on its debt and at the same time keep up pressure on the country to tackle its deficit. German Chancellor Angela Merkel said Dec. 10 Europe has a "responsibility" to help Greece. A day later, European Central Bank President Jean-Claude Trichet said the country must take "courageous action."